Week in FX Asia – USD/JPY Appreciates to 98 as Japanese Deflation Continues

Japanese Prime Minister Shinzo Abe took office in September after promising an end to deflation. He set a very aggressive target of 2% in 2 years. Abe was a vocal critic of the Bank of Japan, whose governor was up for re-election, for not doing enough and his team started making bold statements that took the market by surprise.

Fast forward to today and while the JPY has fallen as the result of the doubling of QE measures and aggressive statements deflation continues to grow. Falling prices discourage consumers as they hold off on spending and thus fail to boost economic growth. Japan’s consumer price index fell 0.9 percent making an already tough job tougher still. Kuroda has stood by his inflation target regardless of economic uncertainties domestically and abroad.

Private-sector economists forecast 1.00% by 2015/2016. There is a lot of ground between what the Bank of Japan and Kuroda have committed themselves and what the private sector expects in terms of inflation. A lot is riding on Japanese policies not only delivering results, but also being perceived as working as their goal is to get the consumers not holding back purchases as prices will go up. This of course will not happen if there is no credibility that the BoJ can be successful in reaching 2% inflation.

Analysts are not the only ones divided on the Bank of Japan’s chances of reaching the 2 percent inflation goal. Members of the Policy board are also not totally onboard with the timeline. The average forecasts showed that while the board as a whole expects 1.8% in two years the range went from 0.8% to 2.3%. That range shows some uncertainty within the BoJ that Inflation can reach a 2% level let alone 1%. Abe and Kuroda face tough times as this was their first credibility test and the market has punished the JPY. The currency was close to the 100 yen barrier and now closing the week at 98.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.

MarketPulse is a forex, commodities, and global indices analysis, and forex news site providing timely and accurate information on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.

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